Quiz 5 Flashcards
Characteristics of a Sole Proprietorship
-owner is the business
- get all profits
- fewer legal formalities
- only pays personal income taxes on business profits
- Personal assets at risk (unlimited liability)
- business dies with owner
- limited ability to raise money
Characteristics of a partnership
-States treat a partnership as a separate legal entity that sue and be sued
-Tax law treats it as a pass-through entity
(Partnership itself doesn’t pay the taxes, partners do)
Partnership by Estoppel
Occurs when a third person has harmfully/reasonably relied on representation by a partner that a non-partner was part of a relationship
Non-partner’s action binding on the partnership
General vs Limited Partners
General: informal
-no written agreement needed
Limited: at least one general and one limited partner
- not the same as an LLC, limits the liability of some of its owners
- in a LP, general partner fully responsible, limited contributes only cash/property (not involved in management, not liable)
Characteristics of an LLC
Hybrid
- Combines the limited liability of a corporation and tax advantages of a partnership
- Owners shielded from personal liability but can still lose the capitol they invested
- Governed by state law (LLC statutes vary from state to state)
- LLC is a legal entity separate from its owners
Advantages and Disadvantages of an LLC
Advantages
-Limited liability
- Flexibility in taxation
- Flexibility in management
Disadvantages
-Non uniform state laws
-Costs more $
Characteristics of an LLP
Hybrid
-Mainly for professionals
(who normally do business as partners in a partnership)
-PROFESSIONALS CAN’T SET UP LLCs
Liability: Sole Proprietors
Owner has unlimited personal liability
Liability: General Partners
In a LP, general partners are fully liable
Liability: limited partners
In a LP, limited partners aren’t personally liable for debts beyond what they invested into the company
Liability: partners in a partnership
-Partners are personally liable for the debts of the partnership
(Basically unlimited liability)
-New partner not liable for prior obligations
Liability: Members of LLCs
Shielded from personal liability but can still lose invested capitol
Liability: members of LLPs
- Professionals can avoid personal liability for malpractice of other partners
- Unlike an LLC, a partner in an LLP is still liable for their own actions
- LLP partner who supervised another is also liable
Liability: corporate shareholders
-Not personally liable unless corporate veil is pierced
Liability: Corporate Officers
- These are employees hired by directors
- Responsible for daily management
- Can go to jail for actions
- Corporations are liable for crimes committed by employees
Liability: Corporate directors
-Elected by shareholders, same liability as officers
Franchise agreement and relationship between Franchisee and Franchisor
Franchise Agreement: a Franchisor (owner of trademark, etc) licenses a franchisee to use the trademark in selling their goods
-Agreement’s basically a contract setting out conditions
- Franchisee pays for the license
- Franchisor receives a % of sales done
- Franchisor determines the territory to be served
- Franchisee handles daily operations
Duty of Care vs Duty of Loyalty
Duty of Care: partner can’t act negligently
Duty of Loyalty: Don’t compete with the partnership, profits derived by partner in conducting the business remains with the business
Piercing the corporate veil
-Occurs when a single-shareholder corporation and personal/corporate assets are mixed
(Corporation has no separate identity)
-Occurs when corporate formalities aren’t observed
Corporation by Estoppel
If a business acts like a corporation, it can’t avoid liability by claiming it’s not one
Jurisdiction for a sole proprietorship
Not a separate legal entity, jurisdiction is same as it is for a regular person
Jurisdiction for a corporation
Deemed a citizen in the state in which its incorporated and in the state where its principal place of business is
Jurisdiction for a partnership
Deemed a citizen of every state in which its partners reside
Applies to LLCs and LLPs
How LLCs are Managed and Taxed
Managed
-member managed
Taxed
- 2+ members taxed as a partnership (pass-through)
- 1 members taxed as a sole proprietorship
